Global Integration for Better or Worse: A Look into Global Digital Currency

It is an inevitable fate for the world to evolve and develop. Despite providing benefits that allow the world to operate more efficiently and conveniently, there may be dire consequences that people face due to changes. Therefore, when a large-scale innovation is implemented, it is vital for people to look into potential repercussions, which in this case is the imposition of a global digital currency.

The cryptocurrency, which is a digital currency, took off to fame when Bitcoin came into popularity. Interestingly, with the growing popularity and potential revolutionization of money, central banks of 19 countries are currently considering the issuance of a digital decentralized currency to replace physical currency. 

 

Cryptocurrency has its strengths. In Zuckerberg’s words, “The idea behind Libra is that sending money should be as easy and secure as sending a message”. Global currency, after all, brings users together under a single currency. Benefits brought by this include near anonymity, lower costs and the elimination of financial intermediaries. These translate to more freedom to individuals and businesses through increased scalability and inclusiveness leading to the creation of global opportunity. 

 

Following the cryptocurrency trend, Facebook proposed a global digital currency, Libra. In comparison to Bitcoin that has a fixed supply of coins and volatile price due to its independence of any financial system, Libra is backed by fiat currencies (money that has value established by the government) and its supply corresponds to the amount of the currencies’ pool value. However, it faced strong opposition from the government and the central bank. With this in mind, some questions to consider are whether Facebook’s digital currency is the right step forwards and whether the resistance against global digital currency is an effort to protect the people or a selfish way to secure market share and control.

 

Looking at it broadly, an overview of whether a global currency should be pursued may provide surface-level consideration. For instance, the government’s official reasons for being against Libra are quite obvious. Libra is supposedly backed by safe instruments such as short-term government bonds and fiat currencies. However, if Libra does work well, these safe instruments will pile up and the investors’ liquidity issue will be raised if they make a run for Libra.

 

Secondly, the system is not advanced enough for Libra to perform as a global currency. To picture its current state, on average, Bitcoin processes around 7 transactions per second while the fastest major cryptocurrency can process 1,500 per second. Visa, a global payment solution,  processes 24,000 transactions per second. Libra wants to become a global system, but at its current state, it is not possible. 

 

If the technology does improve, the next problem is who holds control over this system? What the public has to consider is the government’s unofficial reason. Cryptocurrency threatens to break the monopoly that governments and central banks have on their ability to print money and manipulate the economy in favour of upper-class interests. 

 

Narrowing down from the big picture, a single global currency held by a private company blurs the line between commerce and finance. So, why is this a problem? 

 

Libra, on its own, is a currency not controlled by the Treasury. Thus, Libra will not be competing with other cryptocurrencies but with banks. The fact that Libra is pegged to the US dollar indicates that the dollar will also be exposed to Libra’s risks. Furthermore, Libra places the US dollar in a basket with other currencies, potentially creating problems such as speculation, liquidity issues and the fact that decisions made will affect multiple nations and their economies. 

 

A further possible consequence is the “domination of government by financial and industrial groups” – as warned by President Franklin Roosevelt to Congress in the past – which shines a light on the real threat Libra poses: the ability to be both the owner and operator of a company. For instance, JP Morgan’s ability to charge consumers higher electricity rates was simply due to their ownership of the energy trading business. This suggests that Facebook could potentially open their own bank and offer more favourable credit terms and faster transactions to customers who use its banking services at affiliated retails. A trickle-down effect from this would be the inability of small banks and retailers to compete. 

 

Here, it is not the government that seeks to secure market power, but the big corporations and banks. This is a valid reason for the government to be concerned and to make an effort to limit the possibility of this occurrence in order to protect the people. 

 

Lastly, a single currency that integrates people in a global manner also raises concerns of control. One of cryptocurrency’s key features is the decentralization of control. Traditionally, financial decisions and transactions require a single financial intermediary, such as banks. With cryptocurrency, decentralization is enabled in which the supply and value of the currency are not dependent on financial intermediaries but are controlled by code protocols. Libra contradicts this purpose as it centralizes sensitive users’ information which would pose a threat to greater control and monitoring ability over their transactions and behaviours. Facebook’s past scandals regarding Cambridge Analytica and tampering elections have broken their credibility on the handling of private data. This defeats one of the main purposes and benefits of cryptocurrency and presents a false impression of freedom from control.

 

Certainly, global digital currency provides financial inclusiveness and opportunities to the people, but control is still concentrated within a number of private entities. Concerns regarding private entities having too much power, having access to spending habits of billions of people and exposing risks to other economies make it questionable as to who benefits the most in the end. It is not a zero-sum game between the people and the government as there are other parties involved. In fact, it might present a greater threat as a private company now has monetary power over billions of users.

 

Facebook is indicating that financial inclusion problem is due to faulty technology, thus initiating Libra as a solution. However, it is worth considering that the cause of the problem might be mistaken. When we have this perspective, we can then see that having a new technology implemented might not be the right solution to the current issue with financial inclusion and cost inefficiency.

 

In fact, the solution might actually be to improve what currently exists. The central bank should still have control over the nation’s currency, but the system within itself should be adjusted. For instance, the central bank could make the payment system available to individuals rather than only to banks, which would lead to the provision of real-time payments. Additionally, using retails’ points of contact operations as an answer for the financially marginalized population would allow them to have easy access to money. They can then use payment applications on their phone for transactions.

 

These suggestions show that policy changes in the current monetary system might be a better solution at this stage. It is also better for central banks themselves to consider creating a digital currency in order to ensure control is held by the right entity while also providing the benefits digital currency possesses and taking a careful step towards a cashless future.